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Investors’ enthusiasm remains high for mega-cap tech stocks. Meta (META) and Nvidia (NVDA) have both delivered massive gains year-to-date, beating the S&P 500 Index ($SPX) and Nasdaq-100 Index ($IUXX) alike by a wide margin.
But while Meta and Nvidia stocks have both gained quite a bit, it's worth pointing out that shares of the e-commerce giant Amazon (AMZN) have also made investors rich.
Amazon stock has gained more than 71% year-to-date, despite macro headwinds taking a toll on consumer and enterprise spending. And looking ahead, at least one Wall Street analyst expects this internet commerce and cloud services provider’s stock will reach $230 - the Street-high price target - in the next 12 months. Let’s see why.
AWS: The Key Catalyst Behind Amazon’s Growth
Amazon’s cloud computing arm, Amazon Web Services (AWS), is crucial to the company’s revenue and profitability. Even though macro headwinds have weighed on enterprise spending over the past several quarters and, in turn, took a toll on the segment’s performance, AMZN maintained its leadership in the cloud space and consistently delivered decent growth.
The AWS segment reported revenues of $23.1 billion during the third quarter, marking a 12% year-over-year improvement. The company experienced a quarter-over-quarter revenue boost of over $900 million in AWS, driven by customers migrating new workloads to the cloud. The division’s operating income reached $7 billion, reflecting a year-over-year increase of $1.6 billion. Additionally, the operating margin for the quarter stood at 30.3%, demonstrating a quarter-over-quarter improvement of approximately 600 basis points.
In the short term, the AWS segment may encounter challenges as enterprises continue to optimize their spending. However, the strength of its customer pipeline and improving cost structure will significantly boost the division’s top and bottom line. Furthermore, the company’s increasing artificial intelligence (AI)-driven capabilities provide enormous growth opportunities.
Amazon emphasized that AWS remains a preferred choice for cloud infrastructure, with the number of companies building generative AI apps in AWS growing rapidly. Moreover, Amazon’s strategic moves - such as partnering with Anthropic, making Amazon Bedrock widely accessible, incorporating Meta's Llama 2 model into Bedrock, and enhancing features in CodeWhisperer - are expected to strengthen AWS’ competitive standing, and will enable the company to capitalize on AI-led growth opportunities.
Advertising Segment Offers Durable Growth
Amazon's advertising revenue continues to grow, demonstrating resilience amid a challenging macroeconomic landscape. Notably, third-quarter revenues for the advertising division registered an increase of over 25% to $12.1 billion. This also surpassed the previous quarter’s figure of $10.7 billion.
Amazon’s success in the digital advertising segment is predominantly fueled by its performance-based advertising offerings. The company highlighted that it is leveraging machine learning to enable advertisers to target highly relevant audiences, while maintaining optimal cost efficiency. Further, it launched a generative AI image generation tool to support brands with their ads.
Management sees massive growth opportunities in the advertising vertical. Amazon plans to introduce advertisements into Prime Video shows and movies, which will accelerate the segment’s growth rate. Moreover, customers will pay additional dollars for their subscriptions if they opt for the ad-free tier.
The durability of Amazon's advertising segment is underscored by a consistent growth rate of more than 20% in revenues over the past several quarters. Furthermore, the advertising vertical remains a key growth catalyst for the company’s free cash flow.
Focus on Improving Profitability Supports Amazon’s Bull Case
The ongoing strength in Amazon’s AWS and advertising businesses should help to improve profitability in the coming quarters. In addition, its focus on improving operating efficiency and cost reduction will likely cushion its bottom line.
Besides leverage from high-margin business, Amazon has substantially reduced its workforce, which is driving its margins. Further, Amazon is reorganizing its fulfillment network from a single national hub to eight distinct regions that cater to smaller geographic areas. This strategic transition is aimed at reducing delivery time and overall operational costs.
Bottom Line
Amazon continues to defend and expand its leadership position across cloud and retail. Going forward, the durability of its advertising business; integration of AI capabilities to enhance and optimize all aspects of its services; investments to bolster its same-day delivery capabilities; and focus on reducing costs and improving productivity all bode well for Amazon's future growth - and should drive its share price higher.
Analysts echo these optimistic sentiments in their bullish outlook on AMZN. Out of the 41 analysts covering Amazon, 37 have a “Strong Buy” recommendation, three analysts recommend a “Moderate Buy,” and one has a “Hold.”
While the Street-high price target for AMZN is $230 - indicating nearly 60% potential upside for the shares - the average price target stands at $172.34, which implies about 20% growth potential from current levels.
